Andrew Sorkin - Too Big to Fail - The Inside Story of How Wall Street and Washington Fought to Save the FinancialSystem--and Themselves

Geithner, who had been railing about the need for “decisive action,” all of a sudden started talking about the possibility of opening up the Fed window to virtually any financial institution with any kind of assets. It would be a bold act that would likely be applauded by investors.

“I don’t understand, what do you mean?” Kashkari piped up. “If the Fed really wanted to interpret its authorities creatively, it could do all this without legislation?”

Paulson shot Kashkari an angry look, as it was precisely what he had been hoping that Geithner might convince Bernanke to do—and thus save Paulson a trip to Congress.

“We can’t do that,” Bernanke admonished Geithner.

The call had to end quickly because Paulson and Bernanke were scheduled to brief President Bush in the West Wing on their plan at 3:30 p.m., and Bernanke still needed to drive over from the Fed.

As Paulson and Kashkari began the three-minute walk across the parking lot to the White House, Paulson received a call from Nancy Pelosi.

“Mr. Secretary,” she announced sternly, “we would like to meet with you tomorrow morning because of some of the chaos we see in the markets.”

Knowing that he would need to start building congressional support for his plan as soon as possible, he replied, “Madam Speaker, it cannot wait until tomorrow morning. We have to come today .”

Upon reaching the Oval Office the Treasury officials took their places on the pair of sofas in the middle of the room. Vice President Cheney; Josh Bolten, Bush’s chief of staff—and Paulson’s old friend from Goldman—and several other White House staffers soon joined them, along with Bernanke and Warsh.

Paulson told Bush in no uncertain terms that the financial system was collapsing. “If we don’t act boldly, Mr. President,” he said, “we could be in a depression deeper than the Great Depression,” an assessment with which Bernanke concurred.

Bush was struggling to wrap his mind around the precise course of events. “How,” he questioned, “did we get here?”

Paulson disregarded the question, knowing that the answer would be way too long and lay in a heady mix of nearly a decade of overly lax regulation—some of which he had pushed for himself—overzealous bankers, and home owners living beyond their means. Instead he pressed ahead and told the president that he planned to seek at least $500 billion from Congress to buy toxic assets, explaining that he hoped the program would stabilize the system.

He hastened to point out the political ramifications, suggesting that buying toxic assets was overall a more palatable option than buying stakes in banks themselves.

Bush nodded in agreement but, still confounded by the $500 billion figure, asked, “Is that enough?”

“It’s a lot. It will make a difference,” Paulson assured him. Even if he did want to seek a higher number, Paulson told the president, “I don’t think we can get more.”

They all knew it was going to be a highly politicized issue, but Paulson insisted, “We absolutely need to go to Congress. Treasury doesn’t have the authority.”

For a moment, Paulson paused and then added, “In theory, Ben could always do it.”

Paulson, unexpectedly playing politics himself, appeared to be trying to see how far he could push Bernanke, who, as far as Paulson was concerned, had virtually unlimited powers as long as he was willing to use them.

“Ben, you can do this?” President Bush asked, sensing an opportunity.

Bernanke, however, did not appreciate being put on the spot and tried to sidestep the question. “That is really fiscal policy, not monetary policy,” he said in his professorial tone.

Bush understood. “We need to do what it takes to solve this problem,” he agreed, but given his low approval ratings, he knew he could be of little help on the Hill. “You guys should go up,” he told Paulson and Bernanke. The implication was clear: You’re on your own. But he insisted that the two men sell Congress on the idea quickly.

As they left the White House, Kashkari turned to Paulson and remarked, “I couldn’t believe the kind of pressure you were putting on Ben.”

Paulson just smiled. “Maybe Ben will get there.”

Lloyd Blankfein had not been mollified by the market’s late turnaround, with Goldman’s stock ending the day up at $108, which was still better from its low of $86.31. In his office were Gary Cohn; David Viniar, the firm’s CFO; Jon Winkelried, the co-president; John Rogers; and David Solomon. He knew that until Morgan Stanley fell, Goldman was probably safe, though that was hardly a comfort.

Gary Cohn had been on the phone earlier in the day with Kevin Warsh of the Federal Reserve, brainstorming a way to get in front of the financial tsunami. Warsh threw out the idea that perhaps Goldman should be looking to merge with Citigroup, a fit that could solve major problems for both parties. Goldman could get a huge deposit base, while Citigroup would acquire a management team that investors could support.

Cohn had expressed his doubts about the suggestions. “It probably doesn’t work because I could never buy their balance sheet,” he explained. “And the social issues would be enormous.” The expression “social issues” was yet another Wall Street code for who would run the firm. Goldman’s management didn’t exactly have high regard for Pandit and his team.

“Don’t worry about the social issues,” Warsh told him. “We’ll take care of them.”

That was a not so subtle hint that if a deal was struck, Pandit might be out of a job.

But Blankfein wasn’t particularly interested in either alternative. Rodgin Cohen had been encouraging Goldman to think about transforming the firm into a regulated bank holding company, which JP Morgan and Citigroup were, giving them unlimited access to the Fed’s discount window. It was the same idea that Cohen had unsuccessfully pressed Geithner to consider for Lehman Brothers over the summer, and while Geithner had turned that proposal down, Cohen had become convinced that he might now rule differently given the grave state of the markets.

The notion of becoming a bank holding company had arisen at Goldman from time to time over the years, most recently at their board summer meeting in Russia, where they had discussed the necessity of holding more deposits. Blankfein appreciated that Goldman’s dependence on even a modicum of short-term financing made investors, in this highly charged environment, anxious, and that a deposit base provided a more stable source of capital. Blankfein had always resisted the idea, however, because it came with a hefty price tag in the form of increased regulatory oversight. But these were extraordinary circumstances, to say the least, and the CEO sensed that the world might be moving inexorably in that direction. Given that the bank already had temporary access to the Fed discount window, and that the Fed had literally placed several staffers inside Goldman to monitor the firm, Blankfein started to believe that the prospect of a little extra government regulation didn’t seem particularly onerous.

“This is only going to work if you scare the shit out of them.”

That had been Jim Wilkinson’s advice to Paulson before he and Bernanke left to meet with the congressional leadership at Nancy Pelosi’s office that evening. By Wilkinson’s reckoning, unless they could convince Congress that the world was literally going to come to an end, they would never receive approval for a $500 billion bailout package for Wall Street. Republicans would complain it was socialism; Democrats would carp about rescuing white-collar fat cats.